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Cause for optimism at Hewlett-Packard

Hewlett-Packard's turnaround is far from over, but the company is riding a wave of optimism and is expected to report earnings of 80 cents a share today in its third-quarter conference call.

Hewlett-Packard's turnaround is far from over, but the company is riding a wave of optimism and is expected to report earnings of 80 cents a share today in its third-quarter conference call.

HP's stock price is near its all-time high, partly on the promise of a rosy future and the resolution or a number of key strategic decisions. Among recent changes, it selected Carleton Fiorina to become chief executive, spun off the company's test and measurement organization into the new Agilent Technologies, and realigned its computer line around the delivery of Internet services.

Optimism, however, is tempered by the fact that HP has entered the more difficult phase of making such decisions pay off.

Analysts surveyed by First Call expect HP to report net income of 80 cents per diluted share for its third fiscal quarter, which ended July 31. HP thus has edged past analyst expectations for the last three quarters, although the company continued to be hampered by questions concerning margins and its future. In the first quarter, for instance, HP beat expectations because of cost cutting. During the third quarter last year, HP had earnings of $621 million, or 58 cents per share, on revenues of $11 billion.

The company has been making the rounds describing its Internet services plan, called "e-services," and the core technology for it, called "e-speak." E-speak is designed to let customers easily find what they need from the sprawling Internet. The company has lined up several partners using e-speak, including Merrill Lynch, Uniscape, Captura, and Helsinki Telephone.

In addition, HP faces several more mundane challenges. It could suffer as a result of Wal-Mart's decision to sell Lexmark printers instead of HP's low-cost Apollo line, said Steve Milunovich, a securities analyst with Merrill Lynch. Although printers are getting less expensive -- and therefore less profitable -- HP has experienced "phenomenal" growth in the money it makes selling ink cartridges and other printer supplies, the company has said.

Milunovich estimated a 12 percent revenue gain, to $12.3 billion, for the quarter. "We see strength in PCs, servers, and printers," he said. In particular, HP has been pleased with its new N-Class servers, with which the company hopes to compete better with Internet infrastructure giant Sun Microsystems.

However, the battle with EMC over high-end storage products could take a toll on HP. After three years reselling EMC equipment, HP evicted EMC from its product line, choosing instead to sell Hitachi storage products under the HP name. The deal gives HP a greater share of revenue from each sale, but EMC is a powerful company and has argued that it's untroubled by the HP divorce because it will be able to sell directly to HP customers without having to share revenues.

Meanwhile, HP is in the process of spinning off Agilent Technologies, the group that has sold electronics testing equipment, medical equipment, and a range of chips for tasks such as high-speed optical networks. Agilent has just filed its intent for an initial public offering, and HP expected split-up costs to increase in the most recent quarter.